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State Taxation of Unemployment Benefits

Errata: A previous version of this report erroneously listed 2009 information instead of 2013 information, and listed incorrect information for Maryland and Montana. We regret the error.

Over five million Americans are presently drawing unemployment insurance (UI) benefits.[1] As a joint federal-state program, UI benefits and taxes vary widely by state.[2]

State taxation of unemployment benefits also varies. Of the 41 states that tax wage income, 5 states completely exempt unemployment benefits from tax (California, New Jersey, Oregon, Pennsylvania, and Virginia). Two states partially exempt a fixed dollar amount of benefits from state income tax but tax the rest, following federal practice from 1982 to 1986. The remaining states fully tax unemployment benefits.

On the one hand, unemployment benefits are one type of income and should therefore be encompassed by an income tax. Benefits are subject to federal income tax, and minimizing differences between federal and state definitions of taxable income reduces compliance costs.[3] On the other hand, many beneficiaries are under significant financial stress and often do not expect to owe income tax on their UI benefits.

The table below illustrates income taxation of unemployment benefits in each state.

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Note: This is not the most recent version of this publication. See the 2014 Index here.
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